Realizing smiles: Options pricing with realized volatility
Fulvio Corsi (),
Nicola Fusari and
Davide La Vecchia
Journal of Financial Economics, 2013, vol. 107, issue 2, 284-304
We develop a discrete-time stochastic volatility option pricing model exploiting the information contained in the Realized Volatility (RV), which is used as a proxy of the unobservable log-return volatility. We model the RV dynamics by a simple and effective long-memory process, whose parameters can be easily estimated using historical data. Assuming an exponentially affine stochastic discount factor, we obtain a fully analytic change of measure. An empirical analysis of Standard and Poor's 500 index options illustrates that our model outperforms competing time-varying and stochastic volatility option pricing models.
Keywords: High-frequency; Realized volatility; Option pricing (search for similar items in EconPapers)
JEL-codes: C13 G12 G13 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:107:y:2013:i:2:p:284-304
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